Recent news has focused on the increasing likelihood of rate cuts being announced at the upcoming Federal Reserve meeting in September. Such rate cuts can ripple through the housing market in many ways, both directly and indirectly. Below are the possible channels through which Federal Reserve rate cuts can affect the housing market.

1. Mortgage Rates and Buyer Activity

Federal Reserve rate cuts often push down Treasury yields. And mortgage rates tend to follow the direction of long-term Treasury yields. When the Federal Reserve cut rates in 2020, 30-year mortgage rates dropped under 3%. While we don’t expect mortgage rates to decline so drastically, lower mortgage rates would reduce monthly payments and make home purchases more affordable. Furthermore, existing homeowners could refinance at lower rates.

2. Housing Demand

When the Federal Reserve cuts rates, it tends to signal a more accommodative economic stance which would encourage consumers to make big purchases such as buying a home. The markets could see stronger demand from entry-level buyers since affordability improves significantly when rates fall. Moreover, lower rates could fuel move-up activity for families looking to buy bigger homes.

3. Housing Supply

Lower Federal Reserve rates make other loans in the economy inexpensive as well. This could mean that construction activity gets a boost due to builders being able to obtain cheaper loans for new housing developments. However, homeowners with ultra-low interest rates would still be hesitant to sell their homes, which could limit resale inventory.

4. Home Prices

Stronger demand levels combined with insufficient supply could likely push home prices higher. Some metro areas could see a return to bidding wars on homes in sought-after neighborhoods. On the other hand, slower markets could see more balanced effects on prices.

5. Broader Economic Effects

Increased construction activity due to lower rates can increase residential construction jobs and strengthen local economies. On the other hand, excessive demand fueled by low rates can widen affordability gaps and potentially fuel housing bubbles in some local markets.

For more information on housing, demographic and economic trends in Virginia, be sure to check out Virginia REALTORS® other Economic Insights blogs and our Data page.